Source URL: http://cnx.org/content/m35557/latest/?collection=col11227/latest Saylor URL: http://www.saylor.org/courses/bus305/#4.2.1 Attributed to: [Global Text Project] Saylor.org Page 1 of 20 Chapter 13: Adding Products and Services Global Text Project (2010) Learning objectives Module by: Global Text Project.E-mail the author Edited By: Dr. Donald J. McCubbrey Summary: Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected]. Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA) After reading this chapter, you should: understand the strategic importance of adding and deleting products. understand some methods which can be applied to assist in this decision-making process understand some different approaches for generating new product ideas be familiar with various ways of classifying products and innovations be able to discuss innovations related to business models know the basic methods for evaluating innovations be able to discuss the related topics of failed innovation and product deletion Introduction Module by: Global Text Project.E-mail the author Edited By: Dr. Donald J. McCubbrey Summary: Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected]. Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA)
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Chapter 13: Adding Products and Services Global Text Project (2010)
Learning objectives
Module by: Global Text Project.E-mail the author Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
After reading this chapter, you should:
understand the strategic importance of adding and deleting products. understand some methods which can
be applied to assist in this decision-making process
understand some different approaches for generating new product ideas
be familiar with various ways of classifying products and innovations
be able to discuss innovations related to business models
know the basic methods for evaluating innovations
be able to discuss the related topics of failed innovation and product deletion
Introduction
Module by: Global Text Project.E-mail the author Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA)
Exhibit 1: Sales of individual products and total sales
Introduction
Module by: Global Text Project.E-mail the author Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
The twenty-first century marketplace is dynamic and fast changing. As a result, organizations are under pressure to
evaluate their existing product line and to make continuous decisions about adding new products or deleting existing
products. For instance, the graph in Exhibit 1 shows how an organization must establish a series of successful
products, if that organization wants to maintain a consistent stream of sales or else grow sales over time. One reason
for this pattern is the product life cycle. As shown in the graph, no product lasts forever, and sales levels can
fluctuate dramatically over time. The company illustrated in Exhibit 1 has marketed 8 different products over time. In
the past, four of these products have been deleted (the products labeled as A, B, C, and F). As a result, the sales
level in the most current period depends upon the success of the remaining four products. If the firm has a goal to
increase sales in the coming years, then it is imperative for that firm to introduce a new group of successful products.
Organizations invest a lot of money to create new products that perform effectively. Nonetheless, firms often
struggle to convince people to incorporate these new products into their routines (Arts 2008). For example, it took 18
years for microwave ovens to gain acceptance in Greece (Tellis, Stremersch, and Yin 2003). The ultimate success of
new products depends on consumers accepting them (Arts 2008).
The term “product” refers to both goods and services. A product is anything that can be offered to a market to
satisfy a want or need. There are a number of ways to classify products, and those methods are discussed later in
the chapter. In this chapter, we discuss the following topics: (a) Where do innovations come from? (b) product
categories; (c) Innovation through business models; (d) Evaluating innovations; (e) When innovation fails: deleting
products; and (f) chapter summary. In the next two sections, we briefly discuss innovations and their origins.
Exhibit 1: Sales of individual products and total sales
Innovation through business models
Module by: Global Text Project. E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
A good business model is a story that explains how an enterprise is designed to work (Margretta 2002). A business
model identifies sources of competitive advantage and describes the firm’s pathway to profitability and success. From
a marketing perspective, the business model describes customers and what they value. From a managerial
perspective, the business model describes how an organization makes profit. See Exhibit 1.
In this section, we review some emerging models in the music industry, in order to illustrate how such models can
serve as a source of innovation. That is, a traditional way for organizations to remain profitable is to introduce a
series of related goods. As shown earlier in (Reference), the organization introduces eight products (labeled A
money generated from taxes is then used to pay back artists. Of course, this model is speculative in nature. At
present, there is not a reliable method for tracking all downloads. In addition, devices sold outside of the US would
be difficult to tax.
Summary of new business models
A major purpose in describing these music business models is to illustrate how innovations do not have to be tied to
the success of a new good or service. Rather, an organization can innovate by introducing a new method of doing
business, and such innovation has the potential to “turn the world upside down” (a la Google or Facebook).
Model Currently implemented?
Feasible? Currently legal or illegal?
Consumer satisfaction
Record label satisfaction
Traditional No Not anymore
Legal No Yes
Digital music stores
Yes Yes Legal Yes Yes
Peer-to-peer Stores
Yes Yes Legal Yes Yes
Open Source Yes Yes Illegal Yes No
Artist centered website hub
No Yes Legal Yes No
Artist’s personal website
Yes Yes Legal Yes No
Non-traditional “record lables”
Yes Yes Legal Yes if used with other models
No to traditional record labels
Tax-the-device No Not really Legal ? No TABLE 1: Music Business Models
Evaluating new products
Module by: Global Text Project.E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Discrimination test: conducted to determine the percentage of customers who can distinguish between
product alternatives.
Paired comparison test: respondents evaluate a pair of options and then state their preference between the
options.
Round robin test: all possible product pairs are evaluated, using a format where consumers compare two
products at a time.
Blind test: a new product is compared to existing products.
Under the home-use test, customers are invited to use a new product as part of their everyday life. The home use
test is usually more expensive than the central-location evaluation, but it is more realistic. Popular types of home-use
tests include:
Paired comparison test: participants evaluate two products in normal usage situation and provide evaluations
for both products.
Single-product home-use test (monadic test): participants evaluate one product after using that product for a
specified time period.
Proto-monadic home-use tests: a hybrid design where participants are asked to use a certain product for a
specific time period and then evaluate. Next, participants follow a similar procedure for a second test product.
When innovation fails: deleting products
Module by: Global Text Project. E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
After the expansion strategy failed due to the lack of suitable store locations, Wal-Mart began a price war to drive
small competitors out of business. The intention was to take over the stores of the insolvent supermarket chains and
convert them into Wal-Mart stores. One part of the price war was to introduce a private label called “Smart Brand”
and sell most of these products below manufacturing costs. The reaction of many competitors was to decrease their
prices, which led to a profit setback for the entire industry. However, the Federal Cartel Office interceded and
stopped the price war because there is a law in Germany that enjoins companies from selling goods below
manufacturing costs on a continuing basis (Knorr and Arndt 2003).
Product/ service failure
Wal-Mart planned to introduce a sophisticated customer service program which threatened many of its competitors
because German discount supermarket chains often do not provide good customer service. Therefore, good customer
service, combined with low prices, could have been a new market niche in Germany. One part of Wal-Mart’s
customer service program was called the “ten foot rule”. Every ten feet, a service employee offered some help to the
customer (Knorr and Arndt 2003). However, the customer reaction was rather negative, because customers who
normally do their grocery shopping in discount supermarket chains are used to self-service. They do not necessarily
expect to talk with employees. Therefore, the “ten foot rule” was perceived as rather annoying and did not result in a
reputation for providing good customer service.
Wal-Mart also imported the idea of placing a “greeter” at the entrance to the store. Again, German customers were
not used to this custom, and they did not adopt this “service” with any enthusiasm.
Conclusion of Wal-Mart Mini-case
Wal-Mart tried to apply its US success formula in an unmodified manner to the German market. As a result, they
didn’t have sufficient knowledge about the market structure and key cultural / political issues. In addition, structural
factors prevented Wal-Mart from fully implementing its successful business model. Also, there were some instances
of product or service failure. The final outcome was that Wal-Mart had to abandon its offerings in Germany
Reasons for Failure Examples of Wal-Mart in Germany
Insufficient demand (MS / BM) Wal-Mart’s low price strategy didn’t create any competitive advantage since many German local retailers were already using that strategy.
Existing competitors are too strong (MS)
Wal-Mart’s biggest competitor, Metro, took specific counter-measures to prevent Wal-Mart from executing their expansion plan.
Failure to develop and communicate unique selling propositions (USP) (BM)
The profit margins in the German retail industry were already low before Wal-Mart entered. Wal-Mart was not able to convince German consumers that their prices were really that much lower than the competition.
Unexpected change in the environment— Economic downturn
N/A for Wal-Mart case
Competing new technology successfully introduced
N/A for Wal-Mart case
Change in culture (i.e. change in corporate culture, change in consumer taste or fashion) (C)
Wal-Mart did not adapt well to the German corporate culture.
Changing standard of government regulations (P)
Managers were not familiar with German laws and regulations, so there were violations. In general, Wal-Mart’s anti-union policies conflicted with the strong German union. Wal-Mart also tried to sell their products below manufacturing costs, which is illegal in Germany.
The price is too high, so trial is discouraged
N/A for Wal-Mart case
Poor promotion/communication plan (C)
Language barrier between English-speaking managers and older German business people who don’t speak English.
In retailing, failure to secure attractive sites (MS)
There were not enough appropriate locations for Wal-Mart stores available in Germany.
Product failure (PF)
tores were often located far apart. As a result, logistics costs were high. One of Wal-Mart’s main success factors is to minimize costs, but this goal was restricted by high logistical costs.
Poor service quality—during or after sales (PF)
ome of Wal-Mart’s methods for providing service were not accepted by German customers. For instance, the customers did not like the concept of the “greeter”.
Failure to get corporation from key supply-chain members (BM)
Several key suppliers refused to supply goods, for fear of tarnishing their corporate image.
Notes for Table 4: The reasons for deletion are divided into five categories according to the following legend:MS: Market structure; BM: Business model; C: Culture and communication; P: Politics and regulation; PF: Product failure TABLE 1: Product failure: examples from Wal-mart's investment in Germany
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
New products improve people’s lives, change markets, and affect the everyday world around us (Arts 2008). From an
organizational point of view, successful new products are essential for the survival of a firm. At the same time, an
organization must recognize when it is time to withdraw a product from the market. As shown in(Reference) Figure
1, this withdrawal may take place after some years of success in the marketplace. Alternatively, such product
deletion may occur before the product is even launched (see the section on “Evaluating Innovations”). Sometimes,
clear and straightforward reasons exist to explain why consumers do not accept a new product. Other times, a clear
answer is missing (Arts 2008). In this chapter, we highlight many of the key managerial decisions associated with
adding and deleting products. We emphasize the important role of marketing research and market-based insights.
Discussion questions
Module by: Global Text Project.E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
Discuss various ways to classify innovations and products. Describe how these classification schemes
contribute to managerial knowledge and describe how they are related to the process of innovation.
Using information from the Wal-Mart case that is discussed in the chapter, describe some decisions that
management handled well.
Suppose that you are in charge of expanding Wal-Mart’s operations to France. Describe some actions that
you would take to increase the probability of success in that nation.
Your business partner comes to you with a new product idea. Specifically, she has just returned from a trip to
the Netherlands. Based on her experiences there, she wants your company to start exporting a specialty beer
(Gulpemer) from the Netherlands to the US. Your firm has specific expertise terms of distributing beer in the
eastern United States, and you have some interest in your partner’s idea. Describe how you would evaluate
this idea of adding of Gulpemer to your product line.
A reporter from the New York Times asks you to forecast which method of distributing popular music will be
the most popular in the year 2014. Write a press release on this topic. Be certain to provide a justification for
your prediction.
Discuss five business models that are popular for distributing popular films. Predict which of these models will
be the most successful, five years from now. Provide a convincing justification for your prediction.
Your nephew is a drummer, and he has just formed an alternative rock band. His band is just beginning to
achieve some local success in Seattle, Washington. Your nephew views you as a “new product expert”, so he
asks your advice about how to increase the popularity and profitability of his band’s operations. Make five
specific recommendations to help your nephew and to justify your reputation as “an expert”.
Table 4 provides a description of some reasons that new products fail. Add three more factors to this list.
Discuss some different ways that firms try to develop innovations. For each method that you identify, provide
a specific example of a product that was developed following this approach.
Imagine that you want to start your own business. What product would sell? In two paragraphs, describe
your business model.
Case: “Apples: Newton and Pippin”
Module by: Global Text Project. E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many
who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
Using this website and others, gather some information about the Newton and the Pippin. Then, using the
information from this chapter (e.g. see (Reference)), discuss some reasons that Newton and Pippin failed. To what
extent did these two products fail for the same reasons? Identify one of Apple’s successful products (e.g. the iPhone,
the iPod) and describe how the product managers have been able to avoid some of the problems that sank the
Newton and the Pippin.
References
Module by: Global Text Project.E-mail the author
Edited By: Dr. Donald J. McCubbrey
Summary:
Business Fundamentals was developed by the Global Text Project, which is working to create open-content electronic textbooks that are freely available on the website http://globaltext.terry.uga.edu. Distribution is also possible via paper, CD, DVD, and via this collaboration, through Connexions. The goal is to make textbooks available to the many who cannot afford them. For more information on getting involved with the Global Text Project or Connexions email us at [email protected] and [email protected].
Editors: George M Zinkhan, Anastasia Thyroff, Anja Rempel, and Hongbum Kim (The University of Georgia, USA) Reviewer: Bettina Cornwell (University of Michigan, USA)
Arts, Joep (2008), Essays on New Product Adoption and Diffusion, Amsterdam: the Free University.
Berkman Center (2003). "Copyright and Digital Media in a Post-Napster World,” Research Publication No. 2003-05,
GartnerG2 and The Berkman Center for Internet and Society at Harvard Law School.
http://cyber.law.harvard.edu/publications.
Business (2006): “World's Biggest Retailer Wal-Mart Closes Up Shop in Germany” http://www.dw-